UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _______to ______.
Commission file number 333-76413
----------
GOLDEN SKY DBS, INC.
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 43-1839531
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
c/o Pegasus Communications Management Company
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
--------------
----------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of March 30, 2001, the Registrant's outstanding common stock
consisted of 100 shares of common stock. The Registrant is a wholly owned
subsidiary of Golden Sky Holdings, Inc. None of the Registrant's common stock is
held by non-affiliates of the Registrant.
The Registrant meets the conditions set forth in General Instruction I
1(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format authorized by General Instruction I.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................................................................. 1
ITEM 2. PROPERTIES........................................................................................... 6
ITEM 3. LEGAL PROCEEDINGS.................................................................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................ 9
ITEM 6. SELECTED FINANCIAL DATA.............................................................................. 9
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS ....................................... 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................... 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................... 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 13
ITEM 11. EXECUTIVE COMPENSATION............................................................................... 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................... 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................... 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................... 14
PART I
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. Such statements reflect our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include risks described in this Report including the following: general
economic and business conditions, both nationally, internationally and in the
regions in which we operate; relationships with and events affecting third
parties like DIRECTV, Inc. and the National Rural Telecommunications
Cooperative; litigation with DIRECTV; demographic changes; existing government
regulations and changes in, or the failure to comply with government
regulations; competition; the loss of any significant numbers of subscribers;
changes in business strategy or development plans; technological developments
and difficulties; the ability to attract and retain qualified personnel; our
significant indebtedness; the availability and terms of capital to fund the
expansion of our businesses; and other factors referenced in this Report.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as the date hereof. We do not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
ITEM 1. BUSINESS
General
Golden Sky DBS, Inc. is:
o a wholly-owned subsidiary of Golden Sky Holdings, Inc., which is a
wholly-owned subsidiary of Pegasus Satellite Communications, Inc.
(formerly known as Pegasus Communications Corporation) and is an
indirect subsidiary of Pegasus Communications Corporation.
o an independent provider of DIRECTV that, as of December 31, 2000,
has the exclusive right under agreements with the National Rural
Telecommunications Cooperative to provide DIRECTV programming to
392,100 subscribers in 1.9 million rural households in 24 states and
to receive the monthly service revenue from all DIRECTV subscribers
in these markets regardless of the subscribers' original point of
purchase.
DIRECTV
DIRECTV is a service of Hughes Electronics Corporation, a subsidiary of
General Motors Corporation. DIRECTV offers in excess of 200 entertainment
channels of near laser disc quality video and compact disc quality audio
programming. DIRECTV currently transmits via four high-power Ku band satellites.
We believe that DIRECTV's extensive line-up of pay-per-view movies and events
and sports packages, including the exclusive "NFL Sunday Ticket," have enabled
DIRECTV to capture a majority market share of existing direct broadcast
satellite subscribers and will continue to drive strong subscriber growth for
DIRECTV services in the future. DIRECTV had 1.8 million net subscriber additions
in 2000.
DIRECTV Rural Affiliates
Prior to the launch of DIRECTV's programming service, Hughes
Electronics, which was succeeded by its subsidiary DIRECTV, entered into an
agreement with the National Rural Telecommunications Cooperative authorizing the
National Rural Telecommunications Cooperative to offer its members and
affiliates the opportunity to acquire exclusive rights to distribute DIRECTV
programming services in rural areas of the United States. The National Rural
Telecommunications Cooperative is a cooperative organization whose members and
affiliates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Approximately 250
National Rural Telecommunications Cooperative members and affiliates acquired
such exclusive rights, thereby becoming DIRECTV rural affiliates. The DIRECTV
exclusive territories acquired by DIRECTV's rural affiliates include
approximately 9 million rural households.
Merger with Pegasus Satellite Communications, Inc.
On May 5, 2000, Golden Sky Holdings was merged with a subsidiary of
Pegasus Satellite in a transaction accounted for as a purchase. Stockholders of
Golden Sky Holdings exchanged all of their outstanding capital stock for
approximately 12.2 million shares of Pegasus Satellite's Class A common stock,
valued at $578.6 million, and options to purchase approximately 724,000 shares
of Pegasus Satellite's Class A common stock, valued at $33.2 million. As a
result of this merger, Golden Sky Holdings became a wholly-owned subsidiary of
Pegasus Satellite. The total consideration for the merger was $1.2 billion, as
revised. For more information, see Revision of Pegasus Satellite's Accounting of
the Golden Sky Merger.
Pegasus Satellite did not assume and does not guarantee or otherwise
have any liability for Golden Sky Holdings' outstanding indebtedness or any
other liability of Golden Sky Holdings or its subsidiaries, including our
company. Golden Sky Holdings did not assume and does not guarantee or otherwise
have any liability for any indebtedness or other liability of Pegasus Satellite
or any of Pegasus Satellite's subsidiaries.
The merger was a change in control that required our company to make an
offer to purchase its 13-1/2% senior discount notes due 2007 from the then
existing holders. The merger was also a change in control requiring Golden Sky
Systems to make an offer to purchase its 12-3/8% senior subordinated notes due
2006 from its then existing holders. The offers to purchase the respective notes
expired June 30, 2000. None of the notes for either company were tendered.
Pegasus Satellite Retail Network
Prior to the acquisition of Golden Sky Holdings by Pegasus Satellite,
we used a direct sales force to market and distribute our direct broadcast
satellite services. Since the acquisition of Golden Sky Holdings by Pegasus
Satellite, we use Pegasus Satellite's retail network to market and distribute
our services. The Pegasus Satellite retail network is a network of over 3,500
independent satellite, consumer electronics and other retailers serving rural
areas. Pegasus Satellite began the development of its retail network in 1995 in
order to distribute DIRECTV in its original DIRECTV exclusive territories in New
England. Pegasus Satellite has expanded this network into 41 states as a result
of its acquisitions of DIRECTV rural affiliates since 1996. Today, the Pegasus
Satellite retail network is one of the few sales and distribution channels
available to digital satellite service providers seeking broad and effective
distribution in rural areas throughout the continental United States.
-2-
We believe that the national reach of the Pegasus Satellite retail
network has positioned us to:
o improve the penetration of DIRECTV in DIRECTV exclusive territories
that Pegasus Satellite now owns or that it may acquire from other
DIRECTV rural affiliates;
o assist DIRECTV in improving DIRECTV's direct broadcast satellite
market share in rural areas outside of the DIRECTV exclusive
territories held by the other DIRECTV rural affiliates; and
o offer providers of new digital satellite services, such as digital
audio and broadband multimedia satellite services, an effective and
convenient means for reaching the approximately 30% of America's
population that live and work in rural areas.
Pegasus Satellite Rural Focus and Strategy
We believe that direct broadcast satellite and other digital satellite
services will achieve disproportionately greater consumer acceptance in rural
and underserved areas than in metropolitan areas. Direct broadcast satellite
services have already achieved a penetration of more than 24% in rural areas of
the United States, as compared to approximately 9% in metropolitan areas.
Our long-term goal is to become, as part of the Pegasus Satellite
retail network, an integrated provider of direct broadcast satellite and other
digital satellite services for rural areas of the United States. To accomplish
our goal, we are pursuing the following strategy:
o Continue to grow our rural subscriber base by aggressively marketing
DIRECTV.
o Continue to develop the Pegasus Satellite retail network.
o Generate future growth by bundling additional digital satellite
services with our distribution of DIRECTV services.
Direct Broadcast Satellite Agreements
Prior to the launch of the first DIRECTV satellite in 1993, Hughes
entered into various agreements intended to assist it in the introduction of
DIRECTV services, including agreements with RCA/Thomson for the development and
manufacture of direct broadcast satellite reception equipment and with United
States Satellite Broadcasting for the sale of five transponders on the first
satellite. In an agreement concluded in 1994, Hughes offered members and
affiliates of the National Rural Telecommunications Cooperative the opportunity
to become the exclusive providers of certain direct broadcast satellite services
using the DIRECTV satellites at the 101(degree) W orbital location, generally
including DIRECTV programming, to specified residences and commercial
subscribers in rural areas of the U.S. The National Rural Telecommunications
Cooperative is a cooperative organization whose members and affiliates are
engaged in the distribution of telecommunications and other services in
predominantly rural areas of the U.S. National Rural Telecommunications
Cooperative members and affiliates that participated in its direct broadcast
satellite program acquired the rights to provide the direct broadcast satellite
services described above in their service areas. The service areas purchased by
participating National Rural Telecommunications Cooperative members and
affiliates comprise approximately 9 million television households and were
initially acquired for aggregate commitment payments exceeding $100 million.
-3-
We are an affiliate of the National Rural Telecommunications
Cooperative, participating through agreements in its direct broadcast satellite
program. The agreement between Hughes (and DIRECTV as its successor) and the
National Rural Telecommunications Cooperative, and related agreements between
the National Rural Telecommunications Cooperative and its participating members
and affiliates, provide those members and affiliates with substantial rights and
benefits from distribution in their service areas of the direct broadcast
satellite services, including the right to set pricing, to retain all
subscription remittances and to appoint sales agents. In exchange for such
rights and benefits, the participating members and affiliates made substantial
commitment payments to DIRECTV. In addition, the participating members and
affiliates are required to reimburse DIRECTV for their allocable shares of
certain common expenses, such as programming, satellite-specific costs and
expenses associated with the billing and authorization systems and to remit to
DIRECTV a 5% fee on subscription revenues.
DIRECTV has disputed the extent of the rights held by the participating
National Rural Telecommunications Cooperative members and affiliates. See ITEM
3: Legal Proceedings - DIRECTV Litigation. Those disputes include the rights
asserted by participating members and affiliates:
o to provide all services offered by DIRECTV that are transmitted over
27 frequencies that the FCC has authorized for DIRECTV's use for a
term running through the life of DIRECTV's satellites at the
101(degree) W orbital location;
o to provide certain other services over the DIRECTV satellites; and
o to have the National Rural Telecommunications Cooperative exercise a
right of first refusal to acquire comparable rights in the event
that DIRECTV elects to launch successor satellites upon the removal
of the DIRECTV satellites from their orbital location at the end of
their lives.
The financial terms of the right of first refusal are likely to be the
subject of negotiation and we are unable to predict whether substantial
additional expenditures by the National Rural Telecommunications Cooperative
will be required in connection with the exercise of such right of first refusal.
The agreements between the National Rural Telecommunications
Cooperative and participating National Rural Telecommunications Cooperative
members and affiliates terminate when the DIRECTV satellites are removed from
their orbital location at the end of their lives. Our agreements with the
National Rural Telecommunications Cooperative may also be terminated as follows:
o If the agreement between DIRECTV and the National Rural
Telecommunications Cooperative is terminated because of a breach by
DIRECTV, the National Rural Telecommunications Cooperative may
terminate its agreements with us, but the National Rural
Telecommunications Cooperative will be responsible for paying to us
our pro rata portion of any refunds that the National Rural
Telecommunications Cooperative receives from DIRECTV.
o If we fail to make any payment due to the National Rural
Telecommunications Cooperative or otherwise breach a material
obligation of our agreements with the National Rural
Telecommunications Cooperative, the National Rural
Telecommunications Cooperative may terminate our agreement with the
National Rural Telecommunications Cooperative in addition to
exercising other rights and remedies against us.
-4-
o If the National Rural Telecommunications Cooperative's agreement
with DIRECTV is terminated because of a breach by the National Rural
Telecommunications Cooperative, DIRECTV is obligated to continue to
provide DIRECTV services to our company by assuming the National
Rural Telecommunications Cooperative's rights and obligations under
the National Rural Telecommunications Cooperative's agreement with
DIRECTV or under a new agreement containing substantially the same
terms and conditions as National Rural Telecommunications
Cooperative's agreement with DIRECTV.
We are not permitted under our agreements with the National Rural
Telecommunications Cooperative to assign or transfer, directly or indirectly,
our rights under these agreements without the prior written consent of the
National Rural Telecommunications Cooperative and DIRECTV, which consents cannot
be unreasonably withheld.
The National Rural Telecommunications Cooperative has adopted a policy
requiring any party acquiring DIRECTV distribution rights from a National Rural
Telecommunications Cooperative member or affiliate to post a letter of credit to
secure payment of the National Rural Telecommunications Cooperative's billings
if the acquiring person's monthly payments to the National Rural
Telecommunications Cooperative, including payments on account of the acquired
territory, exceeds a specified amount. Pursuant to this policy, we, along with
Golden Sky Systems, have posted letters of credit of approximately $28.7 million
in connection with completed direct broadcast satellite acquisitions. There can
be no assurance, however, that the National Rural Telecommunications Cooperative
will not in the future seek to institute other policies, or to change this
policy, in ways that would be material to us.
On August 9, 2000, Pegasus Satellite agreed with DIRECTV, Inc. to
provide seamless marketing and sales for DIRECTV retailers and distributors and
to provide seamless customer service to all of its existing and prospective
customers. Under the terms of the agreements, Pegasus Satellite and DIRECTV
reimburse each other for some of the costs incurred in the activation of new
customers in their respective territories. The agreements also allow Pegasus
Satellite to provide customers more expansive service selection during
activation and a simplified and consolidated billing process and dealers receive
compensation regardless of where a customer activates service. In particular,
Pegasus Satellite obtained the right to provide its customers with video
services currently distributed by DIRECTV from certain frequencies, including
the right to provide the premium services HBO, Showtime, Cinemax and The Movie
Channel, which are the subject of litigation between DIRECTV and Pegasus
Satellite, as well as sports programming, local TV stations and DIRECTV PARA
TODOS' Spanish-language programming packages. Under the agreement, Pegasus
Satellite will retain 10% to 20% of the revenues associated with these
additional programming services, with the exception of DIRECTV PARA TODOS'
Spanish-language programming packages, from which Pegasus Satellite will retain
80% of all revenues. Under the terms of the agreement, Pegasus Satellite will be
responsible for all sales, marketing, billing, customer care, and in the case of
PARA TODOS, programming costs associated with providing these services to its
customers. As a subsidiary of Pegasus Satellite, Golden Sky participates in
these agreements on the same terms.
Employees
As of December 31, 2000, we and our subsidiaries, had 101 full-time and
59 part-time employees. We are not a party to any collective bargaining
agreement and consider our relations with our employees to be good.
-5-
Revision of Pegasus Satellite's Accounting of the Golden Sky Merger
Because of Pegasus Satellite's use of the purchase method of accounting
for its acquisition of Golden Sky Holdings, Pegasus Satellite's purchase price
was pushed down to our financial statements and allocated to our assets and
liabilities, resulting in a new basis being assigned to the affected assets and
liabilities. At year end 2000, Pegasus Satellite corrected the purchase
accounting and allocation of the purchase consideration of the acquisition. The
revised merger consideration was $1.2 billion. The revised merger consideration
included $293.7 million of Golden Sky Holdings consolidated net liabilities,
including a deferred income tax asset of $89.3 million, as revised, principally
for cumulative consolidated income tax net operating loss carryforwards existing
at the acquisition date. Also included in the consideration was a deferred
income tax liability of $421.3 million, as revised, principally for the excess
of the book basis over the income tax basis of the revised amount of DBS rights
assets existing at the acquisition date. The revised amount allocated to the DBS
rights of $1.0 billion was net of $94.1 million for the push down effect of
Pegasus Satellite's consolidated deferred income tax valuation allowances no
longer required with the revised effects of the acquisition.
The cumulative effect of the revised purchase accounting from the date
of the acquisition to December 31, 2000 was: an increase in deferred income tax
assets of $14.5 million, a reduction in the valuation allowance applied to
deferred income tax assets of $85.6 million, a reduction in the amount of the
purchase price allocated to DBS rights assets acquired of $251.7 million, a
reduction in the accumulated amortization of DBS rights assets of $10.5 million,
a reduction in deferred income tax liabilities of $64.2 million and a decrease
in additional paid in capital of $94.1 million for the push down effect of
Pegasus Satellite's consolidated valuation allowances no longer required in
association with the acquisition. The effect of these revisions in our statement
of operations for 2000 was a reduction of DBS rights amortization expense of
$10.5 million and an increase in income tax benefits of $6.8 million. See Notes
1 and 13 of the Notes to Consolidated Financial Statements for more information
on the effects of the purchase accounting revision and related restatements of
information previously reported in 2000.
ITEM 2. PROPERTIES
We lease approximately 35,000 square feet of office space in Kansas
City, Missouri. The annual rent under this lease approximates $570,000, and
under its terms, the lease is to terminate in August 2002. We have entered into
an agreement providing for the early termination of this lease to be concurrent
with the opening of our new call center in Lenexa, Kansas in the second quarter
of 2001.
ITEM 3. LEGAL PROCEEDINGS
DIRECTV Litigation
National Rural Telecommunications Cooperative
On June 3, 1999, the National Rural Telecommunications Cooperative
filed a lawsuit in federal court against DIRECTV seeking a court order to
enforce the National Rural Telecommunications Cooperative's contractual rights
to obtain from DIRECTV certain premium programming formerly distributed by
United States Satellite Broadcasting Company, Inc. for exclusive distribution by
the National Rural Telecommunications Cooperative's members and affiliates in
their rural markets. The National Rural Telecommunications Cooperative also
sought a temporary restraining order preventing DIRECTV from marketing the
premium programming in such markets and requiring DIRECTV to provide the
National Rural Telecommunications Cooperative with the premium programming for
exclusive distribution in those areas. The court, in an order dated June 17,
1999, denied the National Rural Telecommunications Cooperative a preliminary
injunction on such matters, without deciding the underlying claims.
-6-
On July 22, 1999, DIRECTV responded to the National Rural
Telecommunications Cooperative's continuing lawsuit by rejecting the National
Rural Telecommunications Cooperative's claims to exclusive distribution rights
and by filing a counterclaim seeking judicial clarification of certain
provisions of DIRECTV's contract with the National Rural Telecommunications
Cooperative. As part of the counterclaim, DIRECTV is seeking a declaratory
judgment that the term of the National Rural Telecommunications Cooperative's
agreement with DIRECTV is measured only by the orbital life of DBS-1, the first
DIRECTV satellite launched, and not by the orbital lives of the other DIRECTV
satellites at the 101(degree)W orbital location. According to DIRECTV, DBS-1
suffered a failure of its primary control processor in July 1998 and since that
time has been operating normally using a spare control processor. While the
National Rural Telecommunications Cooperative has a right of first refusal to
receive certain services from any successor DIRECTV satellite, the scope and
terms of this right of first refusal are also being disputed in the litigation,
as discussed below. This right is not expressly provided for in our agreements
with the National Rural Telecommunications Cooperative.
On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On December 29, 1999,
DIRECTV filed a motion for partial summary judgment. The motion sought a court
order that the National Rural Telecommunications Cooperative's right of first
refusal, effective at the termination of DIRECTV's contract with the National
Rural Telecommunications Cooperative, does not include programming services and
is limited to 20 program channels of transponder capacity. On January 31, 2001,
the court issued an order denying DIRECTV's motion in its entirety for partial
summary judgment relating to the right of first refusal.
If DIRECTV were to prevail on its counterclaim, any failure of DBS-1
could have a material adverse effect on our DIRECTV rights. We have been
informed that DIRECTV may amend its counterclaim to file additional claims
against the National Rural Telecommunications Cooperative. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to the
National Rural Telecommunications Cooperative its share of launch fees and other
benefits that DIRECTV and its affiliates have received relating to programming
and other services. On November 15, 1999, the court granted a motion by DIRECTV
and dismissed the portion of this lawsuit asserting tort claims, but left in
place the remaining claims asserted by the National Rural Telecommunications
Cooperative.
Both of the National Rural Telecommunications Cooperative's lawsuits
against DIRECTV have been consolidated. A trial date of February 25, 2002 has
been set for these lawsuits and two additional lawsuits against DIRECTV
discussed below.
Pegasus Satellite Television, Inc. and Golden Sky Systems
On January 10, 2000, Golden Sky Systems and Pegasus Satellite
Television filed a class action lawsuit in federal court in Los Angeles against
DIRECTV as representatives of a proposed class that would include all members
and affiliates of the National Rural Telecommunications Cooperative that are
distributors of DIRECTV. The complaint contained causes of action for various
torts, common law counts and declaratory relief based on DIRECTV's failure to
provide the National Rural Telecommunications Cooperative with certain premium
programming, and on DIRECTV's position with respect to launch fees and other
benefits, term and right of first refusal. The complaint sought monetary damages
and a court order regarding the rights of the National Rural Telecommunications
Cooperative and its members and affiliates.
-7-
On February 10, 2000, Golden Sky Systems and Pegasus Satellite
Television filed an amended complaint which added new tort claims against
DIRECTV for interference with our relationships with manufacturers, distributors
and dealers of direct broadcast satellite equipment. The class action
allegations Golden Sky Systems and Pegasus Satellite Television previously filed
were later withdrawn to allow a new class action to be filed on behalf of the
members and affiliates of the National Rural Telecommunications Cooperative. The
new class action was filed on February 27, 2000.
On December 10, 2000, the court rejected in its entirety DIRECTV's
motion to dismiss certain of the claims asserted by Pegasus Satellite
Television, Golden Sky Systems and the putative class. On January 31, 2001, the
court denied in its entirety a motion for summary judgment filed by DIRECTV
relating to the right of first refusal. The court also certified the plaintiff's
class on December 28, 2000.
On March 9, 2001, DIRECTV filed a counterclaim against Golden Sky
Systems and Pegasus Satellite Television, as well as the class members. In the
counterclaim, DIRECTV seeks two claims for relief: a declaratory judgement that
Golden Sky Systems and Pegasus Satellite Television have no right of first
refusal in our agreements with the National Rural Telecommunications Cooperative
to have DIRECTV provide any services after the expiration of the term of these
agreements; and an order that DBS-1 is the satellite (and the only satellite)
that measures the term of our agreements with the National Rural
Telecommunications Cooperative. We have been informed by DIRECTV that it intends
to file a motion for summary judgment on both of those claims.
All four lawsuits discussed above, including both lawsuits brought by
the National Rural Telecommunications Cooperative, the class action and Pegasus
Satellite Television's and Golden Sky Systems' lawsuit, are pending before the
same judge. The court has set a trial date of February 25, 2002 for all four of
these actions.
The outcome of this litigation could have a material adverse effect on
our direct broadcast satellite business. Our revenue and financial performance
would be adversely affected if we were unable to continue offering DIRECTV
products.
Other Matters
In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our consolidated operations, cash flows or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In reliance upon General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
-8-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 2000, all 100 issued and outstanding shares of our
common stock ($.01 par value) were held by Golden Sky Holdings. There is
currently no established public trading market for our common stock. Further,
there is no established public trading market for the common stock ($.01 par
value) of Golden Sky Holdings.
We have not declared or paid any cash dividends on our common stock
within the two most recent fiscal years. Our ability to declare dividends is
affected by covenants in our debt facilities that prohibit us from declaring
dividends and prohibit our subsidiaries from transferring funds in the form of
cash dividends, loans or advances to us or Golden Sky Holdings.
ITEM 6. SELECTED FINANCIAL DATA
In reliance upon General Instruction I (2)(a) to Form 10-K, we have
omitted the information called for by this otherwise required item.
-9-
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
In reliance upon General Instruction (I)(2)(a) of Form 10-K, we are
providing the limited disclosure set forth below. Such disclosure requires us
only to provide a narrative analysis of the results of operations that explains
the reasons for material changes in the amount of revenue and expense items
between our most recent fiscal year and the fiscal year immediately preceding
it. The following discussion of our results of operations should be read in
conjunction with the consolidated financial statements and related notes which
are included elsewhere herein. This report contains certain forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those discussed herein.
General
Our business is derived from providing multichannel DBS services as an
independent DIRECTV(R) provider. DIRECTV is a service provided by DIRECTV, Inc.
We may be adversely affected by any material adverse changes in the assets,
financial condition, programming, technological capabilities or services of
DIRECTV, Inc. Separately, we are involved in litigation against DIRECTV, Inc. An
unfavorable outcome in this litigation could have a material adverse effect on
our business. See Note 12 of the Notes to Consolidated Financial Statements and
ITEM 3 - Legal Proceedings - DIRECTV Litigation under Part I for a more
descriptive account of this litigation.
On May 5, 2000, we became an indirect wholly-owned subsidiary of
Pegasus Satellite through a merger of Golden Sky Holdings with a subsidiary of
Pegasus Satellite that was accounted for as a purchase. The stockholders of
Golden Sky Holdings exchanged all of their outstanding capital stock for shares
of Pegasus Satellite's Class A common stock, valued at $578.6 million, and
options to purchase Pegasus Satellite's Class A common stock, valued at $33.2
million. All of the Class A common stock of Pegasus Satellite received by Golden
Sky Holdings' stockholders at the time of the merger, has automatically become,
as part of a reorganization in which Pegasus Satellite adopted a new holding
company structure, the Class A common stock of Pegasus Satellite's new holding
company, Pegasus Communications Corporation. For more information regarding the
reorganization, see Note 14 of the Notes to the Consolidated Financial
Statements.
The total consideration of the merger was $1.2 billion, as revised (see
below). As a result of Pegasus Satellite's use of the purchase method of
accounting for the acquisition, the purchase price was pushed down to our
financial statements and allocated to our assets and liabilities, resulting in a
new basis being assigned to them. The principal effect of the push down of the
purchase price was an increase in the amount of our DBS rights assets by $1.0
billion, as revised (see below).
At year end 2000, Pegasus Satellite corrected the purchase accounting
and allocation of the purchase consideration of the acquisition. The revised
merger consideration included $293.7 million of Golden Sky Holdings consolidated
net liabilities, including a deferred income tax asset of $89.3 million, as
revised, principally for cumulative consolidated income tax net operating loss
carryforwards existing at the acquisition date. Also included in the
consideration was a deferred income tax liability of $421.3 million, as revised,
principally for the excess of the book basis over the income tax basis of the
revised amount of DBS rights assets existing at the acquisition date. The
revised amount allocated to the DBS rights of $1.0 billion was net of $94.1
million for the push down effect of Pegasus Satellite's consolidated deferred
income tax valuation allowances no longer required with the revised effects of
the acquisition.
The cumulative effect of the revised purchase accounting from the date
of the acquisition to December 31, 2000 was: an increase in deferred income tax
assets of $14.5 million, a reduction in the valuation allowance applied to
-10-
deferred income tax assets of $85.6 million, a reduction in the amount of the
purchase price allocated to DBS rights assets acquired of $251.7 million, a
reduction in the accumulated amortization of DBS rights assets of $10.5 million,
a reduction in deferred income tax liabilities of $64.2 million and a decrease
in additional paid in capital of $94.1 million for the push down effect of
Pegasus Satellite's consolidated valuation allowances no longer required in
association with the acquisition. The effect of these revisions in our statement
of operations for 2000 was a reduction of DBS rights amortization expense of
$10.5 million and an increase in income tax benefits of $6.8 million. See Notes
1 and 13 of the Notes to Consolidated Financial Statements for more information
on the effects of the purchase accounting revision and related restatements of
information previously reported in 2000.
Results of Operations
Comparison of 2000 and 1999
In this section, amounts and changes specified are for the year ended
December 31, 2000 compared to the year ended December 31, 1999, unless indicated
otherwise.
As a result of the push down accounting described above, our results of
operations after the merger are not comparable to those prior to the merger. The
period preceding the Golden Sky Holdings merger of January 1 through May 5, 2000
and the period after the merger of May 6 through December 31, 2000 have been
combined to arrive at our results of operations for 2000.
Revenues increased $50.8 million to $187.6 million. This increase was
primarily due to the growth in the number of our subscribers over the last two
years principally from internal growth and to a lesser extent from subscribers
added by acquisitions in 1999. At December 31, 2000, we had 392,100 subscribers,
an increase of 46,800, and exclusive DIRECTV distribution rights to 1.9 million
households. In 1999, we added 105,600 subscribers through net internal growth.
Our subscriber penetration increased to 21.2% from 18.5%.
Programming, technical, general and administrative expenses increased
$16.5 million to $136.7 million. This increase was principally due to the
incremental costs incurred in providing service to an increased subscriber base.
Our marketing and selling expenses decreased $24.5 million to $40.5
million. The decreased expenses principally reflect economies gained in the
merger with Pegasus Satellite through integration of our marketing and selling
function into that of Pegasus Satellite. This significantly reduces our gross
expenditures, particularly with respect to advertising and promotional
programming, and permits spreading of costs over a greater subscriber base
between both of us. We have additionally reduced occupancy costs significantly
by conforming our distribution approach to that of Pegasus Satellite wherein a
network of independent distributors is used for the sales function. Prior to the
merger, our sales function had been conducted largely through rented store
space.
Depreciation and amortization increased $75.0 million to $111.0
million, as revised. Approximately $66.7 million of the increase in amortization
expense occurred in the period after the merger as a result of the increase in
our DBS rights assets of $1.0 billion due to the merger. The annual amortization
expense in succeeding years associated with the increased DBS rights resulting
from the merger will be approximately $100.0 million.
The increase in other operating expenses is primarily due to
nonrecurring costs we incurred in the merger between Pegasus Satellite and
Golden Sky Holdings.
-11-
Interest expense increased $5.4 million to $50.5 million primarily due
to an increase of approximately 3% in the average rate of interest incurred on
amounts outstanding under Golden Sky Systems' revolving credit facility. The
increase in our rate reflects the general increase in market interest rates
available in 2000.
The increase in other non-operating expenses primarily reflects costs
we have incurred in the on-going litigation with DIRECTV, Inc.
As a result of the deferred income tax liabilities, as revised, we
recognized in the merger with Pegasus Satellite, our overall deferred income tax
liabilities exceeded our deferred income tax assets in 2000. As a result,
valuation allowances we had established against deferred income tax assets were
no longer required, and benefits of our deferred income tax assets were
recognized in 2000. In 1999, our deferred income tax assets exceeded our
deferred income tax liabilities. We had established valuation allowances against
these deferred income tax assets in 1999 in the belief at that time that such
tax assets would not be realized, which negated the benefits of these tax
assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk is changes in interest rates. Our principal
interest rate risks are changes in prime and LIBOR rates as our credit
facilities are subject to these rates, which vary in accordance with prevailing
economic conditions.
The following table summarizes our interest rate risk associated with
debt outstanding at December 31, 2000. The table assumes future cash flows
represented by periodic payments and maturities of principal associated with
debt. These cash flows were based on scheduled principal repayments and
maturities and their associated interest rates at December 31, 2000. Because of
their variable and unpredictable nature, the interest rates specified for
variable rate debt for each period presented represents their aggregate weighted
average rate at December 31, 2000. The fair values of fixed rate debt were
estimated based on quoted market prices. The fair values of variable rate debt
were based on their carrying amounts at December 31, 2000 because amounts
outstanding were subject to short-term variable interest rates that approximated
market rates in effect at that date.
(in thousands, except for percentages)
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Debt:
Fixed rate $1,970 $2,946 $1,000 - - $388,100 $394,016 $386,484
Average
interest rate 12.87% 12.92% 12.93% 12.93% 12.93% 12.93%
Variable rate - $350 $1,259 $34,850 $35,541 - $72,000 $72,000
Average
interest rate 10.26% 10.26% 10.26% 10.26% 10.26% -
The weighted average interest rate for our fixed rate debt outstanding
at December 31, 2000 was 12.84% compared to that at December 31, 1999 of 12.77%.
The weighted average rate at each date primarily reflects a combination of the
13-1/2% rate on our senior discount notes due 2007 and the 12-3/8% rate on
Golden Sky Systems' senior subordinated notes due 2006. The annual increases in
the interest rate for fixed rate debt after 2000 as shown in the table reflect
the reduction on other debt with lower rates of interest outstanding at December
-12-
31, 2000 due to their scheduled future principal payments. The weighted average
interest rate on our variable rate debt outstanding at December 31, 1999 was
approximately 10.00%. The rate at December 31, 2000 presented in the above table
was slightly higher principally due to a general rise in market rates during
2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Golden Sky DBS, Inc. required
by this item are included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In a current report on Form 8-K, filed January 3, 2001, we announced
that, on December 26, 2000, our board of directors adopted resolutions
dismissing our independent auditors, KPMG LLP, and approving the engagement of
PricewaterhouseCoopers LLP as our independent auditors for the fiscal year
ending December 31, 2000. Our decision to change accountants was based upon our
company's desire to adopt the accounting firm of our parent corporation, Pegasus
Satellite, and not as a result of any disagreement between our company and KPMG
LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In reliance upon General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
ITEM 11. EXECUTIVE COMPENSATION
In reliance upon General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In reliance upon General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In reliance upon General Instruction I(2)(c) to Form 10-K, we have
omitted the information called for by this otherwise required item.
-13-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements
The financial statements filed as part of this Report are
listed on the Index to Financial Statements on page F-1.
(2) Financial Statement Schedules
Page
----
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1999 and 2000 .............................S-1
(3) Exhibits
The following documents are filed as Exhibits to this report on
Form 10-K or incorporated herein by reference. Each document incorporated herein
by reference is identified by a parenthetical referencing the prior filing in
which it was included.
2.1 Agreement and Plan of Merger, dated as of January 10, 2000,
among Pegasus Communications Corporation and certain of its shareholders,
Pegasus GSS Merger Sub, Inc., Golden Sky Holdings, Inc. and certain of its
shareholders (incorporated herein by reference to Exhibit 2.1 to Pegasus
Satellite Communications, Inc.'s Registration Statement filed on Form S-4
(formerly Pegasus Communications Corporation (File No. 333-31080)).
3.1* Certificate of Incorporation of Golden Sky DBS, Inc.
3.2* By-Laws of Golden Sky DBS, Inc.
4.1 Indenture, dated as of February 19, 1999, between Golden Sky
DBS, Inc., as issuer, and United States Trust Company of New York, as trustee,
relating to the Golden Sky DBS, Inc.'s 13 1/2% Senior Discount due 2007, Series
A, and 13 1/2% Senior Discount Notes due 2007, Series B (incorporated herein by
reference to Exhibit 4.1 to Golden Sky DBS, Inc.'s Registration Statement filed
on Form S-4 (File No. 333-76413)).
4.2 Form of 13 1/2% Senior Discount Note due 2007, Series B, of
the registrant (incorporated herein by reference to Exhibit 4.1 to Golden Sky
DBS, Inc.'s Registration Statement filed on Form S-4 (File No. 333-76413)).
4.3 Indenture, dated as of July 31, 1998, by and among Golden
Sky Systems, Inc., as issuer, Argos Support Services Company, as guarantor,
PrimeWatch, Inc., as guarantor, and State Street Bank and Trust Company of
Missouri, N.A., as trustee, relating to the 12 3/8% Senior Subordinated Notes
due 2006, Series A and 12 3/8% Senior Subordinated Notes due 2006, Series B of
Golden Sky Systems, Inc. (incorporated herein by reference to Exhibit 4.1 to
Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (File No.
333-64367)).
4.4 Form of 12 3/8% Senior Subordinated Note due 2006, Series B
of Golden Sky Systems, Inc. (incorporated herein by reference to Exhibit 4.1 to
Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4) (File No.
333-64367)).
10.1 Amended and Restated Credit Agreement, dated as of May 8,
1998, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., various banks,
Paribas (formerly known as Banque Paribas), as syndication agent, Fleet National
Bank, as administrative agent, and General Electric Capital Corporation, as
-14-
documentation agent (incorporated herein by reference to Exhibit 10.2 to Golden
Sky Systems, Inc.'s Registration Statement on Form S-4 (File No. 333-64367)).
10.2 First Amendment to Amended and Restated Credit Agreement,
dated as of February 10, 1999, among Golden Sky Holdings, Inc., Golden Sky
Systems, Inc., various banks, Paribas (formerly known as Banque Paribas), as
Syndication Agent, Fleet National Bank, as Administrative Agent, and General
Electric Capital Corporation, as Documentation Agent (incorporated herein by
reference to Exhibit 10.17 to Amendment No. 4 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (File No. 333-64367)).
10.3 Amendment and Waiver, dated as of June 14, 1999, among
Golden Sky Holdings, Inc., Golden Sky Systems, Inc., various banks, Paribas
(formerly known as Banque Paribas), as Syndication Agent, Fleet National Bank,
as Administrative Agent, and General Electric Capital Corporation, as
Documentation Agent (incorporated herein by reference to Exhibit 10.24 to
Amendment No. 2 to Golden Sky DBS, Inc.'s Registration Statement on Form S-4
(File No. 333-76413)).
10.4 Second Amendment, Consent and Waiver, dated as of January 4,
2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., the Banks party
thereto from time to time, Paribas formerly known as Banque Paribas), as
Syndication Agent, Fleet National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation Agent (incorporated herein by
reference to Exhibit 10.23 to Golden Sky Systems, Inc.'s Annual Report on Form
10-K for the period ended December 31, 1999 (File No. 333-64367)).
10.5 Third Amendment, Consent and Waiver, dated as of January 20,
2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., the Banks party
thereto from time to time, Paribas (formerly known as Banque Paribas), as
Syndication Agent, Fleet National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation Agent (incorporated herein by
reference to Exhibit 10.24 to Golden Sky Systems, Inc.'s Annual Report on Form
10-K for the period ended December 31, 1999 (File No. 333-64367)).
10.6 Form of National Rural Telecommunications Cooperative/Member
Agreement for Marketing and Distribution of DBS Services, as amended
(incorporated herein by reference to Exhibit 10.3 to Golden Sky Systems, Inc.'s
Registration Statement on Form S-4 (File No. 333-64367)).
24.1* Power of Attorney of the members of the Board of Directors
of Golden Sky DBS, Inc. (included within the signature page hereto).
- ---------------
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
-15-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GOLDEN SKY DBS, INC.
By: /s/ Kasin Smith
--------------------------------------------
Kasin Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: April 2, 2001
The undersigned directors and officers of Golden Sky DBS, Inc. hereby
appoint Marshall W. Pagon, Kasin Smith, Ted S. Lodge or Scott A. Blank or any of
them individually, as attorney-in-fact for the undersigned, with full power of
substitution for, and in the name, place and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, any and all amendments to this Report on Form
10-K, and Exhibits to this Report on Form 10-K, with full power and authority to
do and perform any and all acts and things whatsoever requisite and necessary or
desirable, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Marshall W. Pagon Chairman of the Board, April 2, 2001
- ------------------------------------ Chief Executive Officer
Marshall W. Pagon and President (Principal
Executive Officer)
/s/ Kasin Smith Vice President and April 2, 2001
- ------------------------------------ Chief Financial Officer
Kasin Smith (Principal Financial and
Accounting Officer)
/s/ William Dorran Senior Vice President April 2, 2001
- ------------------------------------ and Director
William Dorran
/s/ Howard Verlin Executive Vice President April 2, 2001
- ------------------------------------- and Director
Howard Verlin
GOLDEN SKY DBS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
Financial Statements:
Reports of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-4
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1999 and for the periods January 1 through
May 5, 2000 and May 6 through December 31, 2000 F-5
Consolidated Statements of Stockholder's Equity (Deficit)
for the years ended December 31, 1998 and 1999 and for the
periods January 1 through May 5, 2000 and May 6 through
December 31, 2000 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1999 and for the periods January 1
through May 5, 2000 and May 6 through December 31, 2000 F-7
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1998, 1999 and 2000 S-1
F-1
Report of Independent Accountants
To the Board of Directors and Investors
of Golden Sky DBS, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page F-1, present fairly, in all material
respects, the financial position of Golden Sky DBS, Inc. and its subsidiaries
(the "Company") at December 31, 2000, and the results of their operations and
their cash flows for the periods from January 1, 2000 to May 5, 2000 and from
May 6, 2000 to December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule for the year ended December 31, 2000 listed in
the index appearing under Item 14(a)(2) on page F-1 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 27, 2001
F-2
Report of Independent Accountants
Board of Directors and Investors
Golden Sky DBS, Inc.:
We have audited the accompanying consolidated balance sheet of Golden Sky DBS,
Inc. and subsidiaries as of December 31, 1999 and the related consolidated
statements of operations, stockholder's equity (deficit) and cash flows for each
of the years in the two-year period ended December 31, 1999. In connection with
our audits of these consolidated financial statements, we have also audited the
financial statement schedule for each of the years in the two-year period ended
December 31, 1999. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Golden Sky DBS, Inc.
and subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement schedule
for 1999 and 1998, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
February 14, 2000
Kansas City, Missouri
F-3
Golden Sky DBS, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, December 31,
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,241 | $ 31,481
Restricted cash 23,731 | -
Accounts receivable, less allowance for doubtful accounts of |
$973 and $1,000, respectively 4,797 | 12,349
Inventory 3,108 | -
Prepaid expenses and other 1,652 | 1,418
Deferred income taxes - | 380
--------- | -----------
Total current assets 36,529 | 45,628
|
Property and equipment, net 5,853 | 3,783
Intangible assets, net 236,926 | 1,141,359
Deferred financing costs, net 11,462 | 10,356
Deposits and other 260 | 3,907
--------- | -----------
Total assets $ 291,030 | $ 1,205,033
========= | ===========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities: |
Current portion of long-term debt $ 3,248 | $ 1,970
Accounts payable 8,089 | 214
Accrued interest 11,679 | 11,233
Accrued satellite programming, fees and commissions 14,804 | 28,446
Accrued expenses and other 943 | 7,528
--------- | -----------
Total current liabilities 38,763 | 49,391
Long-term debt 366,130 | 398,685
Net advances from affiliates - | 6,195
Deferred income taxes - | 284,896
--------- | -----------
Total liabilities 404,893 | 739,167
--------- | -----------
Commitments and contingent liabilities (see Note 12) |
|
Minority interest 936 | 911
|
Common stockholder's equity (deficit): |
Common stock; $0.01 par value; 1,000 shares |
authorized; 100 shares issued and outstanding - | -
Additional paid-in capital 97,754 | 784,574
Accumulated deficit (212,553) | (319,619)
--------- | -----------
Total stockholder's equity (deficit) (114,799) | 464,955
--------- | -----------
Total liabilities and stockholder's equity (deficit) $ 291,030 | $ 1,205,033
========= | ===========
See accompanying notes to consolidated financial statements
F-4
Golden Sky DBS, Inc.
Consolidated Statements of Operations
(In thousands)
2000
Year Ended ------------------------------
December 31, January 1 May 6
1998 1999 to May 5 to December 31
--------- ---------- --------- --------------
Net revenues:
DBS services $ 72,667 $ 136,166 $ 58,061 | $ 122,365
Lease and other 1,014 640 85 | 7,058
--------- ---------- --------- | ---------
Total net revenues 73,681 136,806 58,146 | 129,423
|
Operating expenses: |
Programming, technical, general and |
administrative 61,500 120,205 46,494 | 90,204
Marketing and selling 32,201 64,933 9,565 | 30,885
Depreciation and amortization 23,166 35,963 12,363 | 98,640
Other expenses - 159 1,839 | 428
--------- ---------- --------- | ---------
|
Loss from operations (43,186) (84,454) (12,115) | (90,734)
|
Interest expense (20,537) (45,012) (16,346) | (34,106)
Interest income 1,573 2,394 291 | 447
Other non-operating expenses - (868) (1,513) | (419)
--------- ---------- --------- | ---------
|
Loss before income taxes and extraordinary items (62,150) (127,940) (29,683) | (124,812)
|
Benefit for income taxes - - - | (47,429)
--------- ---------- --------- | ---------
|
Loss before extraordinary items (62,150) (127,940) (29,683) | (77,383)
|
Extraordinary loss from extinguishment of debt (2,577) (2,935) - | -
--------- ---------- --------- | ---------
|
Net loss $ (64,727) $ (130,875) $ (29,683) | $ (77,383)
========= ========== ========= | =========
See accompanying notes to consolidated financial statements
F-5
Golden Sky DBS, Inc.
Consolidated Statements of Stockholder's Equity (Deficit)
(In thousands)
Common Stock
-------------------------- Additional Total
Number Par Paid-In Accumulated Stockholder's
Of Shares Value Capital Deficit Equity (Deficit)
-----------------------------------------------------------------------------
Balances at January 1, 1998 - $ - $ 87,400 $ (16,951) $ 70,449
Contribution from Golden Sky Holdings, Inc. - - 10,200 - 10,200
Net loss - - - (64,727) (64,727)
-------- -------- --------- ---------- ---------
Balances at December 31, 1998 - - 97,600 (81,678) 15,922
Issuance of 100 shares of common stock - - - - -
Deferred compensation pursuant to issuance of Golden -
Sky Holdings, Inc. common stock options - - 154 - 154
Net loss - - - (130,875) (130,875)
-------- -------- --------- ---------- ---------
Balances at December 31, 1999 - - 97,754 (212,553) (114,799)
Deferred compensation pursuant to issuance of Golden
Sky Holdings, Inc. common stock options - - 148 - 148
Net loss - - - (29,683) (29,683)
-------- -------- --------- ---------- ---------
Balances at May 5, 2000 - - 97,902 (242,236) (144,334)
Net push down effect of merger with Pegasus
Satellite Communications - - 662,294 - 662,294
Contributions from Pegasus Satellite Communications - - 24,378 - 24,378
Net loss - - - (77,383) (77,383)
-------- -------- --------- ---------- ---------
Balances at December 31, 2000 - $ - $ 784,574 $ (319,619) $ 464,955
======== ======== ========= ========== =========
See accompanying notes to consolidated financial statements
F-6
Golden Sky DBS, Inc.
Consolidated Statements of Cash Flows
(In thousands)
2000
Year Ended --------------------------------
December 31, January 1 May 6
1998 1999 to May 5 to December 31
--------- ---------- --------- ---------------
Cash flows from operating activities:
Net loss $ (64,727) $ (130,875) $ (29,683) | $ (77,383)
Adjustments to reconcile net loss |
to net cash used for operating activities: |
Extraordinary loss on extinguishment of debt 2,577 2,935 - | -
Depreciation and amortization 23,166 35,963 12,363 | 98,640
Amortization of debt discount and deferred |
financing fees 977 13,676 5,463 | 12,239
Stock incentive compensation - 154 148 | 402
Bad debt expense 1,536 4,076 1,589 | 2,878
Deferred income taxes - - - | (47,429)
Loss on disposal of assets - - 386 | 790
Change in assets and liabilities: |
Accounts receivable (5,423) (3,822) (1,214) | (10,449)
Inventory (8,049) 7,038 794 | 2,314
Prepaid expenses and other (1,228) 207 775 | (541)
Accounts payable and accrued expenses 4,360 8,876 (2,917) | 15,033
Accrued interest 10,223 670 (5,136) | 4,690
Deposits and other - - 151 | (3,798)
--------- ---------- --------- | ---------
|
Net cash used for operating activities (36,588) (61,102) (17,281) | (2,614)
--------- ---------- --------- | ---------
|
Cash flows from investing activities: |
Acquisitions, net of cash acquired (104,487) (36,778) (1,509) | -
Merger costs allocated to DBS rights - - - | (9,202)
Capital expenditures (3,317) (3,452) (209) | (1,424)
Purchase of intangible assets - - - | (4,297)
Other (500) 112 - | -
--------- ---------- --------- | ---------
|
Net cash used for investing activities (108,304) (40,118) (1,718) | (14,923)
--------- ---------- --------- | ---------
|
Cash flows from financing activities: |
Proceeds from long-term debt 189,150 100,049 - | -
Repayments of long-term debt (3,675) (8,846) (2,907) | (1,000)
Net borrowings (repayments) on bank credit |
facilities 7,000 (15,000) 8,000 | 20,000
Advances from affiliates - - - | 6,195
Restricted cash (51,617) 27,886 11,850 | 11,881
Deferred financing costs (5,138) (5,516) (977) | 194
Capital lease payments - - (203) | (257)
Contributions from parent companies - 1,428 - | 12,000
--------- ---------- --------- | ---------
|
Net cash provided by financing activities 135,720 100,001 15,763 | 49,013
--------- ---------- --------- | ---------
|
Net increase (decrease) in cash and cash equivalents (9,172) (1,219) (3,236) | 31,476
Cash and cash equivalents, beginning of period 13,632 4,460 3,241 | 5
--------- ---------- --------- | ---------
Cash and cash equivalents, end of period $ 4,460 $ 3,241 $ 5 | $ 31,481
========= ========== ========= | =========
See accompanying notes to consolidated financial statements
F-7
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Golden Sky DBS, Inc. ("Golden Sky," or together with its subsidiaries,
the "Company") is a holding company formed in February 1999 that operates
through its subsidiaries to provide direct broadcast satellite television
("DBS") services to subscribers in rural areas of 24 states. Golden Sky is a
direct wholly owned subsidiary of Golden Sky Holdings, Inc. ("GSH"). Golden
Sky's principal operating and directly owned subsidiary is Golden Sky Systems,
Inc. ("GSS").
On May 5, 2000, the Company became an indirect wholly-owned subsidiary
of Pegasus Satellite Communications, Inc. ("Pegasus Satellite"), formerly known
as Pegasus Communications, Inc. through a merger of GSH and a subsidiary of
Pegasus Satellite that was accounted for as a purchase. The stockholders of GSH
exchanged all of their outstanding capital stock for 12.2 million shares of
Pegasus Satellite's Class A common stock, valued at $578.6 million, and 724,000
options to purchase Pegasus Satellite's Class A common stock, valued at $33.2
million. All of the Class A common stock of Pegasus Satellite received by Golden
Sky Holding's stockholders at the time of the merger has automatically become,
as part of a reorganization in which Pegasus Satellite adopted a new holding
company structure, the Class A common stock of Pegasus Satellite's new holding
company, Pegasus Communications Corporation. For more information regarding the
reorganization, see Note 14.
The total consideration of the merger was $1.2 billion, as revised (see
below). As a result of Pegasus Satellite's use of the purchase method of
accounting for the acquisition, the purchase price was pushed down to the
Company's financial statements and allocated to its assets and liabilities,
resulting in a new basis being assigned to them. The principal effect of the
push down of the purchase price was an increase in the amount of the Company's
DBS rights assets by $1.0 billion, as revised.
At year end 2000, Pegasus Satellite corrected the purchase accounting
and allocation of the purchase consideration of the acquisition. The revised
merger consideration included $293.7 million of GSH consolidated net
liabilities, including a deferred income tax asset of $89.3 million, as revised,
principally for cumulative consolidated income tax net operating loss
carryforwards existing at the acquisition date. Also included in the
consideration was a deferred income tax liability of $421.3 million, as revised,
principally for the excess of the book basis over the income tax basis of the
revised amount of DBS rights assets existing at the acquisition date. The
revised amount allocated to the DBS rights of $1.0 billion was net of $94.1
million for the push down effect of Pegasus Satellite's consolidated deferred
income tax valuation allowances no longer required with the revised effects of
the acquisition.
The cumulative effect of the revised purchase accounting from the date
of the acquisition to December 31, 2000 was: an increase in deferred income tax
assets of $14.5 million, a reduction in the valuation allowance applied to
deferred income tax assets of $85.6 million, a reduction in the amount of the
purchase price allocated to DBS rights assets acquired of $251.7 million, a
reduction in the accumulated amortization of DBS rights assets of $10.5 million,
a reduction in deferred income tax liabilities of $64.2 million and a decrease
in additional paid in capital of $94.1 million for the push down effect of
Pegasus Satellite's consolidated valuation allowances no longer required in
association with the acquisition. The effect of these revisions in the statement
of operations for 2000 was a reduction of DBS rights amortization expense of
$10.5 million and an increase in income tax benefits of $6.8 million. See Note
13.
The consolidated debt of GSH became part of the consolidated debt of
Pegasus Satellite at the date of the acquisition. As a result, the debt of GSH
is included in Pegasus Satellite's balance sheet at December 31, 2000. Pegasus
Satellite does not guarantee or otherwise have any liability for GSH's
indebtedness or any other liability of GSH or its subsidiaries. GSH does not
guarantee or otherwise have any liability for any indebtedness or other
liability of Pegasus Satellite or any of Pegasus Satellite's subsidiaries.
F-8
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies
Basis of Presentation:
The financial statements include the accounts of Golden Sky and its
subsidiaries on a consolidated basis. All intercompany transactions and balances
have been eliminated. Minority interest represents the cumulative earnings and
losses, after capital contributions, attributable to minority partners and
stockholders. Certain amounts for 1998 and 1999 have been reclassified for
comparative purposes.
As a result of the merger with Pegasus Satellite and Pegasus
Satellite's use of the purchase method of accounting for the GSH acquisition,
Pegasus Satellite's purchase price for GSH was pushed down to the Company's
financial statements and allocated to the affected assets and liabilities,
resulting in a new basis being assigned to them. The push down of the purchase
price increased the value of the Company's DBS rights assets by $1.0 billion, as
corrected for the revision described above. As a consequence of this push down
accounting, the Company's results of operations and cash flows after the merger
are not comparable with those prior to the merger, and these have been
segregated in the respective financial statements. The period preceding the
merger of January 1 through May 5, 2000 and the periods after the merger of May
6 through December 31, 2000 have been combined to arrive at the Company's
results of operations and cash flows for 2000.
The Company's overall business is its only segment and its operations
are managed on the same basis as that presented in the financial statements
contained herein.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to the useful lives and
recoverability of intangible assets and valuation allowances associated with
deferred income tax assets.
Relationship with Affiliate:
As a result of the merger with Pegasus Satellite, the Company's sales
and internal administrative and support functions are managed and performed by
Pegasus Satellite and Pegasus Satellite Television, Inc. ("PST"). Prior to the
merger, these functions were performed directly by the Company. PST is an
indirect wholly owned subsidiary of Pegasus Satellite. Revenue and related
programming and certain subscriber acquisition costs recognized by the Company
are based on subscribers specific to the Company. Interest expense recognized by
the Company is based on its own debt instruments outstanding. PST allocates
other costs of operations common to both PST and the Company, such as customer
care costs, sales function, labor and internal support costs, to the Company
based on a proportion of the Company's number of subscribers. The total amount
of these costs allocated to the Company in 2000 was $9.4 million. PST owns and
manages all inventory for the Company. PST also performs the Company's cash
management functions, including those concerning accounts payable. Balances due
to or from PST are settled in cash monthly.
F-9
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased
with an initial maturity of three months or less. The Company has cash balances
in excess of the federally insured limits at various banks.
Restricted Cash:
The Company had restricted cash held in escrow of $23.7 million at
December 31, 1999 in connection with the indenture for GSS' 12-3/8% Senior
Subordinated Notes due 2006, plus investment earnings thereon. In accordance
with the indenture, the escrow was released in 2000 and used to pay interest due
on the notes. No further escrow balance or requirement exists with respect to
these notes.
Inventory:
As a result of the merger with Pegasus Satellite, the Company no longer
maintains an inventory of equipment for resale as it had prior to the merger.
PST meets all of the equipment needs of the Company's subscribers.
Long-lived Assets:
The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest the carrying amounts may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows. To
date, no such impairments have occurred.
Property and Equipment:
Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets fully depreciated, sold, retired or otherwise
disposed of are removed from the respective accounts and any resulting gains and
losses are included in results of operations. Expenditures for repairs and
maintenance are charged to expense when incurred. Expenditures for major
renewals and betterments that extend the useful lives of the related assets are
capitalized and depreciated. Depreciation is computed for financial reporting
purposes using the straight-line method based upon the following lives:
Equipment, furniture and fixtures.................... 5 to 10 years
Buildings and improvements........................... 3 to 10 years
Vehicles and other equipment......................... 3 to 5 years
F-10
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (continued)
Intangible Assets:
Intangible assets are stated at cost. The cost and related accumulated
amortization of assets fully amortized, sold, retired or otherwise disposed of
are removed from the respective accounts and any resulting gains and losses are
included in results of operations. Amortization of intangible assets is computed
for financial reporting purposes using the straight-line method based upon the
following lives:
DBS rights........................................... 10 years
Other intangibles.................................... 2 to 15 years
Deferred Financing Costs:
Financing costs incurred in obtaining long-term financing are deferred
and amortized over the term of the applicable financing. Accumulated
amortization was $2.7 million and $4.8 million at December 31, 1999 and 2000,
respectively. The Company uses the straight-line method to amortize these costs.
Revenue:
Principal revenue is earned by providing video and audio programming to
viewers who subscribe to the service. This revenue is recognized over the
subscription period and when viewed for on demand programming.
Subscriber Acquisition Costs:
Marketing and selling expenses incurred are also known as subscriber
acquisition costs. Subscriber acquisition costs are sales and marketing expenses
incurred and promotional programming provided in connection with the addition of
new subscribers. These are charged to expense in the period incurred.
Advertising Costs:
Advertising costs are charged to operations in the period incurred and
were $5.1 million in 1998, $5.9 million in 1999, $1.4 million in the period
January 1 through May 5, 2000 and $5.6 million in the period May 6 through
December 31, 2000.
Income Taxes:
As a result of the merger with Pegasus Satellite, the Company is
included in the consolidated income tax return of Pegasus Satellite. Prior to
the merger with Pegasus Satellite, the Company participated in the consolidated
income tax return of GSH. The Company's income tax expense or benefit is
computed on a separate return basis.
The Company accounts for income taxes utilizing the asset and liability
approach, whereby deferred income tax assets and liabilities are recorded for
the tax effect of differences between the financial statement carrying values
and tax bases of assets and liabilities. Deferred income taxes are measured
using enacted tax rates and laws that will be in effect when the underlying
assets or liabilities are expected to be received or settled. A valuation
allowance is recorded for deferred income taxes where it appears more likely
than not that the Company will not be able to recover the deferred income tax
asset.
F-11
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash and
cash equivalents. Concentrations of credit risk with respect to trade
receivables are limited due to the large numbers comprising the Company's
subscriber base and their dispersion across different businesses and geographic
regions. At December 31, 1999 and 2000, the Company had no other significant
concentrations of credit risk.
Reliance on DIRECTV:
The Company's business is derived from providing DBS services as an
independent DIRECTV(R) ("DIRECTV") provider. DIRECTV is a service of DIRECTV,
Inc. Because the Company is a distributor of DIRECTV services, the Company may
be adversely affected by any material adverse changes in the assets, financial
condition, programming, technological capabilities or services of DIRECTV, Inc.
Currently, the Company is in litigation against DIRECTV, Inc. (see Note 12).
New Accounting Pronouncements:
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 138, became effective for the Company on January 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. The adoption of this standard on January 1, 2001 did not
have any impact on the Company as the Company did not have any derivative
instruments on the date of adoption.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
addresses revenue recognition policies and practices of companies that report to
the SEC. SAB 101 became effective for the Company in the fourth quarter of 2000
and did not have any impact on the Company upon its adoption.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Certain
provisions of this standard are effective for fiscal years ending after December
15, 2000 and other provisions are effective after March 31, 2001. The provisions
of the statement effective after December 15, 2000 did not have any impact on
the Company, and the Company believes that the provisions that are not yet
effective will not have any impact on the Company upon adoption.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
December 31, December 31,
1999 2000
------------ ------------
Equipment, furniture and fixtures....... $ 7,754 $ 6,022
Building and improvements............... 1,248 545
Vehicles................................ 888 47
Other .................................. 1,881 3,097
------- -------
11,771 9,711
Accumulated depreciation................ (5,918) (5,928)
------- -------
Net property and equipment.............. 5,853 3,783
======= =======
F-12
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Property and Equipment (continued)
Depreciation expense was $2.2 million in 1998, $2.7 million in 1999,
$972,000 in the period January 1 through May 5, 2000 and $1.5 million in the
period May 6 through December 31, 2000.
4. Intangible Assets
Following are intangible assets at December 31, 1999 and 2000 (in
thousands). DBS rights at December 31, 2000 were revised (see Note 13).
December 31, December 31,
1999 2000
--------- ----------
DBS rights.............................. $266,874 $1,270,498
Other................................... 30,973 40,429
--------- ----------
297,847 1,310,927
Accumulated amortization................ (60,921) (169,568)
--------- ----------
Net intangible assets................... $236,926 $1,141,359
========= ==========
The increase in DBS rights is due to the allocation of Pegasus
Satellite's purchase price in the merger, as revised (see Note 13). Amortization
expense was $21.0 million in 1998, $33.3 million in 1999, $11.4 million in the
period January 1 through May 5, 2000 and $97.3 million, as revised (see Note
13), in the period May 6 through December 31, 2000.
5. Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31, December 31,
1999 2000
------------ ------------
Senior Subordinated Notes due
2006 of GSS, interest at 12.375%, payable
semi-annually on February 1
and August 1.................................. $195,000 $195,000
Senior Discount Notes due March 2007 of
Golden Sky, interest at 13.5%,
payable semi-annually on March 1
and September 1, commencing September 1,
2004, net of unamortized discount of
$81.0 million and $65.4 million as of
December 31, 1999 and 2000, respectively...... 112,095 127,739
Senior seven-year $115.0 million revolving
credit facility of GSS, interest at GSS'
option at either the lender's rate plus an
applicable margin or LIBOR plus an
applicable margin............................. 17,000 37,000
Senior seven-year $35.0 million term loan
facility of GSS, interest at GSS' option at
either the bank's rate plus an applicable
margin or LIBOR plus an applicable margin..... 35,000 35,000
Other notes, due 2001 to 2003, interest at
6.75% to 7%................................... 9,823 5,916
Capital leases and other........................ 460 -
-------- --------
369,378 400,655
Less current maturities......................... 3,248 1,970
-------- --------
Long-term debt.................................. $366,130 $398,685
======== ========
Golden Sky's 13 1/2% Senior Discount Notes due March 2007 were issued
at a discount and have a stated principal amount at maturity of $193.1 million.
These notes are unsecured and effectively rank below all liabilities of Golden
Sky's subsidiaries. Non-cash interest accretes on these notes until March 1,
2004. Thereafter, cash interest will accrue and be payable semi-annually. After
March 1, 2004, Golden Sky has the option to redeem the notes at prices specified
in the indenture for these notes.
GSS has a credit agreement consisting of a $115.0 million senior
revolving credit facility that expires September 2005 and a $35.0 million senior
term loan facility that expires December 2005. Amounts borrowed under the
agreement are unconditionally and irrevocably guaranteed by Golden Sky.
F-13
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long Term Debt (continued)
GSH and subsidiaries of GSS. These borrowings are secured by the capital stock
of Golden Sky, GSS and subsidiaries of GSS, a first priority security interest
in all of the assets of GSS' subsidiaries and a collateral assignment of GSS'
agreements with the National Rural Telecommunications Cooperative. The agreement
contains certain financial covenants, including a debt to adjusted cash flow
covenant. The borrowing commitment under the revolving facility automatically
and permanently reduces quarterly over the term of the facility starting on
March 31, 2001. Principal amounts outstanding in excess of the reduced
commitment are to be repaid on each commitment reduction date. Principal
outstanding under the term loan facility is payable quarterly in increasing
increments over the term of the facility starting on March 31, 2002. Amounts
repaid under the term facility may not be reborrowed. The margin on revolver
base rates is 3% and the margin on revolver LIBOR rates is 3.25%. Margins on
term loans are 4.25% for base rates and 4.5% for LIBOR rates. Margins may be
reduced as specified in the agreement on the basis of the level of a specified
ratio computation. Interest on outstanding principal borrowed under base rates
is due and payable quarterly and interest on outstanding principal borrowed
under LIBOR rates is due and payable the earlier of the end of the contracted
interest rate period or three months. Unused amounts under the revolving
facility are subject to commitment fees ranging from .5% to 1.25% based on the
aggregate of borrowings outstanding and letters of credit issued under the
facility.
In January 2000, GSS amended the agreement in which its third quarter
1999 covenant violations were waived and certain fourth quarter 1999 and year
2000 covenant requirements were amended. In December 2000, GSS borrowed $20.0
million under the revolving facility. At December 31, 2000, $35.9 million of
stand-by letters of credit were issued under the revolving facility that reduce
the availability thereunder. The weighted average rates of interest, including
applicable margins, on amounts outstanding at December 31, 2000 were 9.90% for
the term facility and 10.26% for the revolving facility. The combined weighted
average interest rate including applicable margins on the credit agreement was
approximately 10.0% at December 31, 1999.
GSS' $195.0 million of 12-3/8% Senior Subordinated Notes due August
2006 are guaranteed on a full, unconditional, senior subordinated basis, jointly
and severally by specified subsidiaries of GSS. The notes are unsecured senior
subordinated obligations that are subordinated to other senior indebtedness of
GSS such as, among other things, its credit agreement and letters of credit.
After August 1, 2003, GSS has the option to redeem the notes at prices specified
in the indenture for these notes.
The indebtedness described above generally limit the ability, among
other things, to incur additional indebtedness and liens, issue other
securities, make certain payments and investments, pay dividends, transfer cash,
dispose of assets and enter into other transactions, and imposes limitations on
the activities of subsidiaries as applicable.
When GSS entered into its existing credit agreement in 1998, the former
credit agreement in effect at that time was terminated and the associated
unamortized deferred financing costs were written-off as an extinguishment of
debt of $2.6 million. In 1999, GSS amended the existing credit agreement and
wrote-off unamortized deferred financing costs at the date of the amendment as
an extinguishment of debt of $2.9 million.
F-14
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Long Term Debt (continued)
At December 31, 2000, maturities of long-term debt at their stated
maturity values were as follows (in thousands):
2001........................... $ 1,970
2002........................... 3,296
2003........................... 2,259
2004........................... 34,850
2005........................... 35,541
Thereafter..................... 388,100
Commitment fees incurred in 1998, 1999 and 2000 were not significant.
GSH's merger with Pegasus Satellite was a change in control that
required the Company to make an offer to purchase its 13-1/2% senior discount
notes due 2007 from then existing holders. The merger was also a change in
control requiring GSS to make an offer to purchase its 12-3/8% senior
subordinated notes due 2006 from then existing holders. The offers to purchase
the respective notes expired June 30, 2000. None of the notes for either company
were tendered.
6. Leases
After the merger with Pegasus Satellite, the Company's leases are
primarily for office and telecommunications equipment through separate operating
lease agreements. The operating leases expire at various dates through 2002.
Rent expense was $2.5 million in 1999, $1.6 million in the period January 1
through May 5, 2000 and $652,000 in the period May 6 through December 31, 2000.
At December 31, 2000, the Company had no capital leases. Future minimum lease
payments on noncancellable operating leases at December 31, 2000 were $1.9
million in 2001 and $1.1 million in 2002. No lease payments presently exist
beyond 2002.
7. Income Taxes
Following is a summary of income taxes for 1998, 1999 and 2000 (in
thousands). Amounts in 2000 were revised (see Note 13).
1998 1999 2000
--------- --------- ---------
Current:
Federal................................................. $ 16,325 $ 36,437 $ -
State and local......................................... 3,097 6,913 -
---------- -------- ---------
Total current........................................... 19,422 43,350 -
---------- -------- ---------
Deferred:
Federal................................................. 3,103 3,122 (38,762)
State and local......................................... 615 592 -
Change in valuation allowance........................... (23,140) (47,064) (8,667)
---------- -------- ---------
Total deferred.......................................... (19,422) (43,350) (47,429)
---------- -------- ---------
Benefit attributable to continuing operations............. $ - $ - $ (47,429)
========== ======== =========
F-15
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Income Taxes (continued)
Following are deferred income tax assets and liabilities at December
31, 1999 and 2000 (in thousands). Amounts at December 31, 2000 were revised (see
Note 13).
1999 2000
---------- ----------
Assets:
Receivables.................................................... $ 383 $ 380
Accrued expenses............................................... 337 -
Excess of tax basis over book basis of property, plant and
equipment................................................... 139 218
Excess of tax basis over book basis of amortizable
intangible assets........................................... 8,255 -
Loss carryforwards............................................. 71,738 99,739
Other.......................................................... 861 -
---------- ----------
Total deferred tax assets................................... 81,713 100,337
---------- ----------
Liabilities:
Excess of book basis over tax basis of amortizable
intangible assets........................................... - (384,853)
---------- ----------
Total deferred tax liabilities............................... - (384,853)
---------- ----------
Net deferred tax assets (liabilities).............................. 81,713 (284,516)
Valuation allowance................................................ (81,713) -
---------- ----------
Net deferred tax liabilities....................................... $ - $(284,516)
========== ==========
The increase in the value of DBS rights resulting from the merger with
Pegasus Satellite created a deferred income tax liability, as revised (see Note
13), that placed the Company in a net deferred income tax liability position in
2000. Accordingly, the valuation allowances against deferred income tax assets
existing at the date of the merger were no longer required. At December 31,
2000, the Company had net operating loss carryforwards for income tax purposes
of $262.4 million available to offset future taxable income that expire
beginning 2008 through 2020.
Following is a reconciliation of the Federal statutory income tax rate
to the Company's effective Federal income tax rate attributable to continuing
operations for 1998, 1999 and 2000. Amounts in 2000 were revised (see Note 13).
1998 1999 2000
------ ------ ------
Statutory rate.............. (34.00)% (34.00)% (35.00)%
Valuation allowance......... 37.20 36.70 -
Other....................... (3.20) (2.70) (3.00)
------ ------ ------
Effective rate.............. -% -% (38.00)%
====== ====== ======
F-16
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Supplemental Cash Flow Information
Following are significant noncash investing and financing activities
for 1998, 1999 and 2000 (in thousands). The net push down effects of and net
deferred taxes recognized in merger amounts in 2000 were revised (see Note 13).
1998 1999 2000
--------- ---------- ------------
Net push down effects of merger with Pegasus Satellite................ $ - $ $662,294
Net deferred taxes recognized in merger with Pegasus Satellite........ - - 331,944
Debt repaid and merger costs paid by Pegasus Satellite................ - - 12,378
Borrowings under credit facilities refinanced......................... 88,000 - -
Debt assumed in acquisitions.......................................... 10,157 - -
Notes payable assumed in acquisition of minority interest............. - 2,925 -
Preferred stock issued in acquisition................................. 10,200 - -
The Company paid cash for interest of $9.3 million in 1998, $30.0
million in 1999, $15.8 million in the period January 1 through May 5, 2000 and
$17.4 million in the period May 6 through December 31, 2000. The Company paid no
income taxes in 1998, 1999 and 2000.
9. Acquisitions
In 1998 and 1999, the Company acquired 19 and 10 independent DIRECTV
providers, respectively, along with the rights to provide DIRECTV programming in
various rural areas of the United States and related assets in exchange for
total consideration of $124.8 million and $35.3 million, respectively. These
acquisitions were accounted for under the purchase method.
10. Financial Instruments
The carrying and fair values of the Company's financial instruments at
December 31, 1999 and 2000 were as follows (in thousands):
1999 2000
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Debt....................................... $369,378 $395,511 $400,655 $393,123
Golden Sky's and GSS' notes are publicly-held and their fair values
were estimated based on their quoted market prices. The carrying value of debt
outstanding under credit facilities approximates fair value because the
outstanding amounts are subject to short-term variable rates of interest, and
the rates in effect at December 31, 1999 and 2000 approximate the market rates
available at that date. The carrying value of other financial instruments equals
or approximates fair value.
11. Employee Benefit Plans
Prior to the merger with Pegasus Satellite, the Company had a 401(k)
retirement plan and stock incentive plan. These plans were terminated in
conjunction with the merger. No expenses were incurred for these plans in 1998
and 2000 and expenses incurred in 1999 were not significant. Stock options
outstanding at the date of the merger under Golden Sky's plan of 55,000 were
converted into 724,000 stock options of Pegasus Satellite under its stock option
plan, as adjusted for Pegasus Satellite's two-for-one stock split effected in
May 2000. The value of the stock options converted was included in Pegasus
Satellite's purchase accounting for the merger. Participants in the 401(k) plan
at the date of the merger were given the option to later enroll in Pegasus
Satellite's 401(k) plan, roll over their plan amounts into another plan or take
distributions of plan amounts in accordance with their employment status with
the Company or Pegasus Satellite after the merger.
F-17
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Commitments and Contingent Liabilities
DIRECTV, Inc., Litigation
GSS is an affiliate of the National Rural Telecommunications
Cooperative ("NRTC"). The NRTC is a cooperative organization whose members and
affiliates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. GSS' ability to
distribute DIRECTV programming services is dependent upon agreements between the
NRTC and Hughes Electronics Corporation and between the Company and the NRTC.
The NRTC
On June 3, 1999, the NRTC filed a lawsuit in federal court against
DIRECTV, Inc. seeking a court order to enforce the NRTC's contractual rights to
obtain from DIRECTV, Inc. certain premium programming formerly distributed by
United States Satellite Broadcasting Company, Inc. for exclusive distribution by
the NRTC's members and affiliates in their rural markets. The NRTC also sought a
temporary restraining order preventing DIRECTV, Inc. from marketing the premium
programming in such markets and requiring DIRECTV, Inc. to provide the NRTC with
the premium programming for exclusive distribution in those areas. The court, in
an order dated June 17, 1999, denied the NRTC a preliminary injunction on such
matters, without deciding the underlying claims.
On July 22, 1999, DIRECTV, Inc. responded to the NRTC's continuing
lawsuit by rejecting the NRTC's claims to exclusive distribution rights and by
filing a counterclaim seeking judicial clarification of certain provisions of
DIRECTV Inc.'s contract with the NRTC. As part of the counterclaim, DIRECTV,
Inc. is seeking a declaratory judgment that the term of the NRTC's agreement
with DIRECTV, Inc. is measured only by the orbital life of DBS-1, the first
DIRECTV satellite launched, and not by the orbital lives of the other DIRECTV
satellites at the 101(degree)W orbital location. According to DIRECTV, Inc.,
DBS-1 suffered a failure of its primary control processor in July 1998 and since
that time has been operating normally using a spare control processor. While the
NRTC has a right of first refusal to receive certain services from any successor
DIRECTV satellite, the scope and terms of this right of first refusal are also
being disputed in the litigation, as discussed below. This right is not
expressly provided for in our agreements with the NRTC.
On September 9, 1999, the NRTC filed a response to DIRECTV, Inc.'s
counterclaim contesting DIRECTV, Inc.'s interpretations of the end of term and
right of first refusal provisions. On December 29, 1999, DIRECTV, Inc. filed a
motion for partial summary judgment. The motion sought a court order that the
NRTC's right of first refusal, effective at the termination of DIRECTV, Inc.'s
contract with the NRTC, does not include programming services and is limited to
20 program channels of transponder capacity. On January 31, 2001, the court
issued an order denying DIRECTV, Inc.'s motion in its entirety for partial
summary judgment relating to the right of first refusal.
If DIRECTV, Inc. were to prevail on its counterclaim, any failure of
DBS-1 could have a material adverse effect on our DIRECTV rights. The Company
and Pegasus Satellite have been informed that DIRECTV may amend its counterclaim
to file additional claims against the NRTC.
On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV, Inc. claiming that DIRECTV, Inc. had failed to provide to the
NRTC its share of launch fees and other benefits that DIRECTV, Inc. and its
affiliates have received relating to programming and other services. On November
15, 1999, the court granted a motion by DIRECTV, Inc. and dismissed the portion
of this lawsuit asserting tort claims, but left in place the remaining claims
asserted by the NRTC.
F-18
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Commitments and Contingent Liabilities (continued)
Both of the NRTC's lawsuits against DIRECTV, Inc. have been
consolidated. A trial date of February 25, 2002 has been set for these lawsuits
and two additional lawsuits against DIRECTV, Inc. discussed below.
Pegasus Satellite Television, Inc. ("PST") and GSS
On January 10, 2000, GSS and PST filed a class action lawsuit in
federal court in Los Angeles against DIRECTV, Inc. as representatives of a
proposed class that would include all members and affiliates of the National
Rural Telecommunications Cooperative that are distributors of DIRECTV, Inc. The
complaint contained causes of action for various torts, common law counts and
declaratory relief based on DIRECTV, Inc.'s failure to provide the National
Rural Telecommunications Cooperative with certain premium programming, and on
DIRECTV, Inc.'s position with respect to launch fees and other benefits, term
and right of first refusal. The complaint sought monetary damages and a court
order regarding the rights of the NRTC and its members and affiliates.
On February 10, 2000, GSS and PST filed an amended complaint which
added new tort claims against DIRECTV, Inc. for interference with our
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. The class action allegations GSS and PST previously filed
were later withdrawn to allow a new class action to be filed on behalf of the
members and affiliates of the NRTC. The new class action was filed on February
27, 2000.
On December 10, 2000, the court rejected in its entirety DIRECTV,
Inc.'s motion to dismiss certain of the claims asserted by GSS, PST and the
putative class. On January 31, 2001, the court denied in its entirety a motion
for summary judgment filed by DIRECTV, Inc. relating to the right of first
refusal. The court also certified the plaintiff's class on December 28, 2000.
On March 9, 2001, DIRECTV, Inc. filed a counterclaim against GSS and
PST, as well as the class members. In the counterclaim, DIRECTV, Inc. seeks two
claims for relief: a declaratory judgement that we have no right of first
refusal in the agreements with the NRTC to have DIRECTV, Inc. provide any
services after the expiration of the term of these agreements; and an order that
DBS-1 is the satellite (and the only satellite) that measures the term of the
agreements with the NRTC. GSS and PST have been informed by DIRECTV, Inc. that
it intends to file a motion for summary judgment on both of those claims.
All four lawsuits discussed above, including both lawsuits brought by
the NRTC, the class action and PST's and GSS's lawsuit, are pending before the
same judge. The court has set a trial date of February 25, 2002 for all four of
these actions.
The Company's revenue and financial performance would be adversely
affected if the Company was unable to continue offering DIRECTV products.
13. Quarterly (Unaudited) Financial Information as Reported and Restated
As discussed in Note 1, at year end 2000, Pegasus Satellite corrected
the purchase accounting and allocation of the purchase consideration of the
acquisition. Because of the magnitude of these revisions, the Company is
restating previously reported financial information. The restatements only
affect information reported subsequent to the acquisition, which commences with
the period May 6 through June 30, 2000.
Following is unaudited quarterly statement of operations information
for each quarter within 1999 and 2000 and for the periods April 1 through May 5,
2000 and May 6 through June 30, 2000. The information required to be reported in
this quarterly summary is net revenues, loss from operations, loss
F-19
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Quarterly (Unaudited) Financial Information as Reported and Restated
(continued)
before extraordinary items and net loss. This information in 2000 is presented
as previously reported and, for periods subsequent to the GSH acquisition, as
restated for the revisions discussed above. In addition to these items, the
Company is presenting other items previously reported within the periods
subsequent to the GSH acquisition that are affected by and being restated for
the above revisions.
Quarter Ended April 1 May 6 Quarter Ended Quarter Ended
(in thousands) March 31, through May through June September 30, December 31,
(unaudited) 2000 5, 2000 30, 2000 2000 2000
-------------- ------------- -------------- ---------------- ----------------
Net revenues............................... $ 43,548 $14,598 $29,125 $45,951 $54,347
Depreciation and amortization expense:
As reported............................. 25,796 42,268
As restated............................. 23,171 38,330
Loss from operations:
As reported............................. (9,364) (2,751) (21,949) (40,303) (35,045)
As restated............................. (19,324) (36,365)
Benefit for income taxes:
As reported............................. (8,454) (12,297)
As restated............................. (10,647) (18,607)
Net loss:
As reported............................. (21,835) (7,848) (22,189) (40,608) (29,652)
As restated............................. (17,371) (30,360)
As a result of the revisions to the purchase accounting of the GSH
acquisition, amortization expense for DBS rights was reduced by $3.9 million and
income tax expense of $1.7 million was recognized in the quarter ended December
31, 2000.
Quarter Ended
(in thousands) March 31, June 30, September 30, December 31,
(unaudited) 1999 1999 1999 1999
-------------- ------------- ---------------- -----------------
Net revenues............................... $28,585 $31,370 $36,355 $40,496
Loss from operations....................... (16,734) (19,166) (29,930) (18,624)
Loss before extraordinary items............ (25,872) (30,104) (41,087) (30,877)
Net loss................................... (28,807) (30,104) (41,087) (30,877)
In the first quarter of 1999, the Company had an extraordinary loss of
$2.9 million in connection with an amendment to GSS' credit agreement.
F-20
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Quarterly (Unaudited) Financial Information as Reported and Restated
(continued)
Following is balance sheet information for the second and third
quarters ended in 2000 as previously reported and restated for the GSH purchase
accounting revisions.
Quarter Ended
(in thousands) June 30, September 30,
(unaudited) 2000 2000
-------------- -----------------
Intangible assets, net:
As reported........................................ $1,466,015 $1,430,398
As restated........................................ 1,216,976 1,185,297
Net non-current deferred income tax liabilities:
As reported........................................ 481,012 468,716
As restated........................................ 321,297 302,691
Total stockholder's equity (deficit):
As reported........................................ 614,394 574,024
As restated........................................ 525,070 494,948
14. Subsequent Events
On February 22, 2001, Pegasus Communications adopted a new holding
company structure. In the reorganization, all common and preferred stock of
Pegasus Satellite (formerly named Pegasus Communications Corporation) was
exchanged for identical common and preferred stock of its new holding company,
which assumed the name Pegasus Communications Corporation, and thereby, Pegasus
Satellite became a direct subsidiary of the new holding company.
F-21
GOLDEN SKY DBS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1999 and 2000
(In thousands)
Balance at Additions Additions
Beginning of Charged To Charged To Balance at
Description Period Expenses Other Accounts Deductions End of Period
----------- ------------ ---------- -------------- ---------- -------------
Allowance for Uncollectible
Accounts Receivable
- -------------------------------
Year 1998 $138 $1,537 - $1,382 (b) $293
Year 1999 293 3,909 - 3,229 (b) 973
Year 2000 973 4,467(a) - 4,440 (b) 1,000
Valuation Allowance for
Deferred Tax Assets
- -------------------------------
Year 1998 $11,509 $23,140 - - $34,649
Year 1999 34,649 47,064 - - 81,713
Year 2000 81,713 - $7,609 (c) $89,322 (d) -
(a) Amount for the period January 1 through May 5, 2000 was $1,589, and for the
period May 6 through December 31, 2000 was $2,878.
(b) Amounts written off, net of recoveries.
(c) Increase in net operating loss carryforwards incurred during the year.
(d) As a result of the merger with Pegasus Satellite Communications, the
valuation allowance existing at the date of the merger was no longer
required.
S-1